Which Investment is Right for Me? Part II
The Flip
Many real estate companies are in the business of purchasing distressed properties, adding value by rehabilitating the property and then reselling the property to a new buyer. The condition of the property can vary greatly. On the one extreme, the property might need a deep cleaning, new paint and new carpet while on the other extreme it may need to be gutted to the studs and have everything from dry wall to plumbing replaced. After these properties are rehabilitated, the real estate company can resell or “flip” the property. When you invest in a “flip,” you are investing in the fact that the real estate company can sell the property for a higher price than what they paid for the property plus the cost of the renovations. The difference is the profit. Flips typically last between 5 months and 1 year before they are resold.
The Buy and Hold
Other real estate companies prefer to purchase assets they are going to hold for the long term, typically for 2-7+ years. These properties also vary in condition. Some may need a lot of renovation while others are already fully rented to tenants. Properties that need little work and are already producing profits are typically called “turn-key” properties. When you invest in “buy-and-hold,” you are banking on the real estate company managing the property effectively to continue generating cash flows and betting on appreciation of the property over time.
The Fund
In a “flip” and in a “buy-and-hold” investment, you typically know the exact property you are invested in. You will generally know the address and if you are local, driving to the property and looking at it is one way you can do due diligence. In a fund, you do not always know the exact properties you are investing in. In a “blind fund”, you might now know any of the exact real estate properties that you are investing in. The real estate company will be able to make buy and sell decisions on your behalf, but they have to stay within the confines of their investment policy statement. Funds outline the type of investments they can invest in and the proposed exit strategies. Legally, the managers of funds have a fiduciary duty to their investors and should not stray from the strategy outlined in the fund. In a “semi-blind fund”, you will know some of the exact properties that are being invested in, but not all of them. Funds allow managers to take advantage of trends in the marketplace faster – rather than raising money for each property, they can deploy money quicker and close quickly using “all-cash”. Funds can be structured to invest in many different types of real estate including “flips” and “buy-and-hold” properties. Funds typically last between 1 and 5+ years.
As with any investment, there are advantages and disadvantages. Some investors like the short duration and liquidity of flips while other investors prefer to hold on a little longer for appreciation.
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